Irish Economy
Irish Corporate Tax 2014: Noonan signalls publicity offensive on effective rate
By Michael Hennigan, Finfacts founder and editor
Feb 24, 2014 - 7:16 AM

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Michael Noonan, Irish finance minister, Brussels, Feb 18, 2014.

Irish Corporate Tax 2014: Michael Noonan, finance minister, signalled in a statement last Thursday that his Department is preparing a report on the corporation tax rate that is expected to be ready by the end of March as part of a publicity offensive to counter claims that Ireland's effective rate (actual tax paid or provided for in an accounting period as a ratio of reported net income) is in low single digits.

The minister has also changed the official talking point that the effective rate is 11.9% to 10.5% -- Finfacts had said in 2010 and 2011 that the domestic flower-pot manufacturer template in an annual study on taxes, has no applicability to the typical multinational subsidiary operating in Ireland.

It should be clear that the headline rate of 12.5% is not an issue in the evolution of new international tax rules.

The head of tax for the Organisation for Economic Co-Operation and Development, who is responsible for the ongoing OECD/G-20 (group of twenty) Base Erosion and Profit Shifting Project has told Ireland it must charge 12.5% tax and not 2% if it wants to retain its tax regime - - the reference to 2% was the estimated overseas tax rate of Apple, through the use of Irish non-tax resident companies, according to the US Senate Permanent Subcommittee on Investigations in May 2013.   

Pascal Saint-Amans told a conference in Dublin last June that Ireland's tax regime was "low and attractive" - - the headline rate compares with a simple average of 25% for the OECD's 34 mainly developed countries.

Noonan said in his statement in response to a parliamentary question from Deputy Richard Boyd-Barrett:

I think it’s important to clarify at the outset that there are two separate scenarios that are often confused in discussions on the effective rate of corporation tax.

The first is the global rate of tax which is paid by multinational companies who operate across a number of jurisdictions. This is a ‘blended’ rate which takes into account the amount of tax charged across all of the countries that a company trades in and not just Ireland.

The extremely low effective rate figures that have been quoted over the past week and attributed to Ireland are based on a flawed premise. The figures are estimated by dividing the amount of Irish tax paid by a total profit figure that includes substantial profits made by companies that are not tax resident in Ireland. They are running together the profits earned by group companies in Ireland and in other jurisdictions and incorrectly suggesting that Irish tax does or should apply to both.

Ireland cannot tax profits that are properly attributable to other jurisdictions...The second issue is the effective rate of tax applying in individual countries. Clearly, the domestic rate of tax paid in Ireland is within the control of the Irish tax system - - and Ireland is responsible for the amount of Irish corporation tax that is charged here. I want to reemphasise that all companies operating in Ireland - - domestic businesses and multinationals - - are chargeable to corporation tax at the 12.5% rate on the profits that are generated from their trading activities here."

Last September, Finfacts estimated that the effective tax rate for US companies was 2.5% in 2010, using US Bureau of Economic Analysis (BEA) data, including investment income attributed to Ireland, (see Bloomberg chart below) and this month, it was new news in some quarters when Prof Jim Stewart of Trinity College put the rate at 2.2% in 2011, using BEA data.

Image credit Bloomberg; Finfacts, Sept 2013: US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000. We use the same 2010 US Bureau of economic Analysis (BEA) data in our article as is used in the Bloomberg image above. Gary Tobin and Keith Walsh, Irish civil servants, argued in a paper last year that the profits data used is "notoriously volatile from year to year." This can be seen to be an unreliable claim as the only dip in the trend was in 2009, the year after the collapse of Lehman Brothers, the US investment bank. In the chart, note the divergence of the profit line from the jobs line from the late 1990s.

Ireland was the world's most profitable country for US corporations, according to analysis by US tax journal Tax Notes in 2004. In a study by the journal's Martin Sullivan, it was found that profits made by US companies in Ireland doubled between 1999 and 2002 from $13.4bn to $26.8bn, while profits in most of the rest of Europe fell. In his analysis Sullivan termed Ireland a 'semi-tax haven' for US firms, because firms are involved in real productivity in contrast with locations such as Bermuda.

Between 1999 to 2002, US multinational corporations increased profits in countries with no taxes or low rates by 68% while sharply reducing profits recorded in countries where they engage in substantial business activity, a study published in the journal Tax Notes shows. 

In 2011/2012, Apple's foreign tax rate was 1.9%, Microsoft's was 4% in its 3 regional sales centres: Ireland, Puerto Rico and Singapore, and Google's rate was 5.3% in 2012, rising to 8.6% in 2013 (page 79; pdf) - - this rate is about one-third of international headline rates. Google's total (US and overseas) effective rate was 15.7%, down from 19.4% in 2012.

Noonan says total Irish corporation tax payable as a percentage of taxable profits was approximately 10.5% for 2011.

The tax paid by Google and Microsoft, on net income after multi-billion royalty charges results in effective rates of 11% (€17m on €154m) and 13.2% (€132m on €1bn) respectively, appearing to confirm the official line that Ireland's effective rate of corporate tax (actual tax paid as a ratio of net income) is close to the headline rate of 12.5%. However, the net income in Ireland is minimised through huge intercompany charges.

Finfacts 2013: IMF explains “Double Irish Dutch Sandwich” tax avoidance

The strategy of proclaiming no responsibility for the Irish non-resident tax companies is an absolute sham.

Google's Dutch-Irish-Dutch sandwich grew to €8.8bn in 2012 with that amount transferred from Ireland via the Netherlands to an Irish company in Bermuda with a physical presence on the island that amounts to a letter box in the offices of an offshore services company. Here are the  Google Netherlands 2012 accounts

1. In the Finance Act, 1999, under pressure from the EU, all Irish-incorporated companies were to become resident for tax purposes; however, multinational companies were given an exemption and these companies are mainly used for tax avoidance.

2. In 2011/2012, Microsoft booked 24% of its global revenues in Ireland; in 2012 Google booked over 40% and Facebook booked 48% of global revenues in Ireland -- almost all its ex-US revenues.

A total of about €40bn of virtual exports or 44% of Ireland services exports in 2012 also boosted Ireland's output and without the benefit of the net exports, Ireland would have reported a GDP contraction in 2012 rather than a small positive. Productivity data is also impacted - - these exports are effectively fake but thay are part of the national accounts.

In February 2013, Michael Noonan, finance minister, at a Bloomberg event in London, attributed the jump in services exports to “the significant price and cost adjustments that have taken place in recent years.” It was not true!

Last April in a speech in Amsterdam, Mario Draghi, ECB president, said on the reduction in unit labour costs: "Ireland has seen an 18 percentage point improvement relative to the euro area average." Again it reflected a distortion.

In July 2013, Microsoft was declared Ireland's top exporter after a 37% jump in virtual exports value in its 2011/2012 fiscal year. Google was the runner up in the Irish Exporters' Association rankings and Dell was in fourth place for virtually "exporting" from Ireland, €10bn worth of PCs produced in Poland.  

3. Mailbox Irish holding companies in West Atlantic island tax havens, avail of secrecy courtesy of unlimited status provided by Irish company law.

4. It is US companies who identify Ireland as the location of profits used in BEA data - - for example Google and Facebook says in their Securities and Exchange Commission filings: "Although we file U.S. federal, U.S. state, and foreign tax returns, our two major tax jurisdictions are the U.S. and Ireland."

5. Google Netherlands Holdings BV is owned by Google Ireland Holdings, Bermuda. The Dutch mailbox company, receives funds from Dublin and it booked €10.4bn in sales in 2012 and expenses of €32,750 -- it doesn't even have an employee.

The funds come from Dublin for onward transfer to Bermuda.

Pfizer, Ireland's largest merchandise exporter, is owned by  Dutch partnership and it has a similar arrangement.

5. BEA FDI (foreign direct investment) data gets an official imprimatur from Richard Bruton, enterprise minister, who in 2013 launched the American Chamber of Commerce in Ireland annual FDI report

Last year the chamber made a bold claim: "In the past half decade, US firms have invested more capital in Ireland than in the previous half century."

Finfacts reported last October that despite a claim of new investment of $129.5bn in the period 2008-2012, only 3,300 permanent net jobs were added by US firms in Ireland.

In this case, the data is distorted by tax avoidance as retained earnings reflect tax-related 'trapped cash' that is counted as an inflow.

Finfacts 2013: Ireland's confusing FDI data in age of spin

6. Noonan says "Ireland cannot tax profits that are properly attributable to other jurisdictions" but its resident companies book the revenue and what is profit is transferred out without any tax via charges with a small amount reported as net income in Ireland. Besides, the transfers end up in Irish companies in other jurisdictions and if the Irish Revenue did some checking, it may find that the profits are not "properly attributable."

Google has reported  UK revenues of $5.6bn in 2013 but it may have booked up to $5.0bn in Dublin with no tax liability on the profit.

Note again that huge revenues are booked in Ireland that are unrelated to activity in Ireland and become part of the national accounts but Noonan argues that even though the related profits are moved from Ireland and end up in Irish companies in tax havens, they should not be classified as Irish. 

Selection of Finfacts tax reports 2013/14:

Corporate Tax 2014: White House and Congress to publish US reform proposals

Corporate Tax 2014: US proposal of 17% rate for foreign profits

Irish Corporate Tax 2014: How official spin and distortion works - in short-term

Corporate Tax 2014: Obama running with the hare and hunting with the hounds

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Corporate Tax 2014: Yahoo! joins “Double Irish Dutch Sandwich” club; IDA Ireland wants more members 

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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